Cash. We could all use more of it. That's why many investors turn to dividend stocks. The case for good dividend stocks is simple: Investors don't need to rely solely on unrealized gains to get a return on their investment -- they get to look forward to a cash deposit every quarter.
But how do you find the top dividend stocks? You'll need to muster up some contrarianism and look where others aren't. If you want abnormal returns, you'll need to act abnormally.
Where to search
Let's begin by looking at some megacap tech-leaders. In doing so, you've already (a) identified an undervalued sector many investors have abandoned and (b) narrowed your search down to the leaders in their respective industries. Particularly, let's look at Apple (AAPL 0.38%) and Intel (INTC 0.10%), two excellent businesses that have been battered and bruised over the past year.
Enduring
Top dividend stocks need more than just a good dividend yield -- they need to be enduring businesses. A dividend yield won't get you anywhere if your principal takes a nosedive.
Most enduring businesses have two things in common: market leadership and consistently high returns on invested capital to prove it.
Apple's market leadership is as clear as day. If there's a definite duopoly in any industry, it's in handsets. Apple and Samsung, together, captured 100% of the industry's worldwide profits in the first quarter of 2013, according to Canaccord Genuity. Apple took the lead with 57% of profits, and Samsung followed behind with 43%. But Apple's share of profits is quite surprising, given that it captured only 8% of the global handset market share.
Intel's leadership comes from its economies of scale. As the world's largest semiconductor company by far, it has far more money to spend on research and development and also has cutting-edge manufacturing capabilities. To add some perspective to just how significant Intel's economies of scale really are, compare its market capitalization of $118.4 billion with that of its closest competitor, Advanced Micro Devices, at just $2.9 billion.
Furthermore, Apple and Intel have had above-average returns on invested capital in the trailing 10-year, five-year, and three-year periods. Today, Apple stands at a whopping 33.3% return on invested capital and Intel at a nice 17.2%. This is clear evidence that both companies benefit from competitive advantages -- namely, brand recognition and economies of scale.
Reasonably priced
Top dividend stocks should be reasonably priced, to lower the risk on your principle and let you focus on the prospective income.
Apple and Intel are as cheap as market leaders come in today's frothy stock market. Apple and Intel's stock prices have dropped, but measured by free cash flow yield, their ability to generate the cold, hard cash that builds shareholder value is still intact. Furthermore, measured by this metric, these two market leaders are comparatively cheap compared with other dividend-paying market leaders.
AAPL Free Cash Flow Yield data by YCharts
Meaningful dividends
Obviously, top dividend stocks should have nice dividends yields. Apple and Intel undoubtedly deliver, with dividend yields of 2.7% and 3.8%, respectively. These are considerable yields, given that analysts, on average, expect Apple and Intel's EPS to increase by 20.88% and 11% per annum for the next five years, respectively.
Well-rounded
Like Apple and Intel, top dividend stocks must be well-rounded, meeting all of the criteria I've laid out; the business must be enduring, the stock should be reasonably priced, and the dividends should crush the return you could get in your savings account.
If you're looking for the top dividend stocks to invest in today, give Apple and Intel some serious consideration.
What do you think? Are Apple and Intel great dividend stocks? What dividend stocks are you betting on?
